Costs And Competition

by Steven van Groningen on 6 January, 2012

Every now and then the discussion about costs in the banking system surfaces. The latest example was in the Ziarul Financiar of last wednesday in which professor Dan Armeanu, under the title “Why I Agree With Mister Governor,” gives his opinion.  I’ll not go into the content of the article but it didn’t seem very scientific to me. You can find it here.

Nothing New

The discussion about cost in the banking system is an old one. I myself took the initiative years ago to commission a study by a third party, Roland Berger, about costs in the Romanian banking system. It was financed by 3 banks. High costs are not in the interest of the bank and more expensive financial services are not in the interest of their clients. I thought a study might help to get a discussion going. The document was quickly marginalized and it is now gathering dust somewhere on shelves in institutions. It is good to see that nowadays there is more interest in the cost of the Romanian banking system.

What The Governor Said

According to the press, the Governor said that, possible due to insufficient competition, banks can pass on costs to their clients that are the result of deficiencies in their internal organization or risk assessment. He called for stronger competition in the financial system. Articles in the press can be found here (Gandul) and here (Mediafax).

I found it interesting that he mentioned the cost of internal organization and risk management. These are in my view the cost that are less likely to be passed on but I agree that stronger competition would make this even less likely.

Two Types Of Costs

We can split cost that banks are facing roughly into two groups. So far I haven’t seen this being pointed out. Maybe an interesting subject for a study by the professor ?

Exogenous, System Related

The first group are those that are linked to the environment and are the same for all banks in the country. We can call them exogenous factors. Banks will manage these as good as they can but these costs will be passed on to the clients, much in the same way as a VAT increase is paid for by the consumer. Maybe not from one day to the other, but over time this is the case.

Examples of this type of costs are related to:

  • Deposit insurance contributions,
  • Minimum reserve requirements
  • Measures imposed by Consumer Protection Authorities
  • Increased liquidity requirement
  • Additional capital requirements
  • Repossessing of assets
  • Collection costs
  • Infrastructure related costs
  • Regulatory costs
  • Accounting rules, like non accrual policy, write off policy
  • Taxes, including VAT
  • Certain legal costs, like checking of ownership titles
  • Country risk costs

Please note that I am not necessarily against the above mentioned costs, I merely point out that these costs are system related and they cannot be influenced by individual banks and are as such not going to be influenced by fiercer competition (on national level). On the other hand they might reduce competition and competitiveness. Almost all of the above mentioned cost have gone up over the last years.


Then we have the costs that are not linked to the environment but are the results of decisions made by individual banks. These are the costs that were mentioned by Governor Isarescu. If a bank decides to assume more risk in its lending activity than others and as a result has more credit losses, then this bank will not be able to pass this cost on to its customers for the simple reason that the clients will not be willing to pay more for credits and will choose another bank. The same applies if a bank decides to open branches without having the business volumes to justify them. The related costs will be translated into lower profits or losses for the shareholder. Banks with a higher cost structure cannot be more expensive than more efficient banks. Indeed, the fiercer the competition the lower the possibility for banks to pass this type of costs on to the client. Exactly the fact that some banks are still reasonably profitable and others severely loss making shows that this cannot be passed on. Banks make losses because of credit losses and investments in their branch networks. These are not the exogenous factors.

So, what to do?

If we want to have cheaper financial services in Romania and cheaper credit, we should be willing to address – at least question and challenge – the exogenous costs as well. This can only be done on the level of the system. Individual banks cannot influence them. These are rules and laws that are the result of a democratic processes and banks need to respect the outcome. At the same time there is very little real dialog and consultation taking place during this process. The opinion seems to be that banks are making enough profit and that the costs of the measures don’t matter. I have heard this more than once from the side of lawmakers. I wanted to point out that this is naive. Measures that increase the costs for banks on a systemic level will increase the cost of lending  and financial services and this will negatively affect economic growth. Again, if politicians accept this, that is not my business but up to the electorate. I would like to see a proper impact analysis and debate for the benefit of the country. And as far as competition is concerned? I’ll write about this soon.




{ 17 comments… read them below or add one }

Marcel Hoster January 6, 2012 at 21:17

Dear mr. van Groningen, it was really interesting reading you opinions. Very accurate, well documented. Well… unfortunatelly i see you are talking “the corporate way”. Reading about the costs you call internal, in the paragraph you say a bank can’t put the costs on her clients, the will go to another bank. Is it really so? Have you ever payed an interest of 12 to 14% to euro and kept on being refused by the bank when asking for a decent solution to get a refinance, a way of lowering that gourgeous rate? Nooo, you are a decent man, a good banker, coming from a decent country, obviously used whith a gold business card and credit rates similar to ECB rates! The so called “rules” made by your superbanks are done in such way that you just can escape from a mistake you made some time ago pressured by some needs! No way you’ll get a refinance! Your incomes are lower now, so you don’t qualify for something else, at a better rate! Even though you can pay, hardly truelly, your monhly credit, you pure and simple just don’t qualify for a lower bank rate! So you are able to pay more, but not in position to pay less. It’s really delightfull to watch your monthly timetable and see that insurance payed to a “friendly” company, monhly administratrive costs, and bla bla costs, known only by the bank are in total highier than the rate itself. Luckily there are few of us who really know to read a timetable. Luckily for you, so that the stupid one can only think that the state and the world crisis is making a sclave out of him…


SvG January 7, 2012 at 00:51

Indeed I was referring more to someone who has the freedom of choice and not someone looking for refinancing. This is indeed a problem in the current circumstances and I doubt if more competition will solve this. At least the early repayment fees have now been banned. That is one step in the the right direction. At what Loan to Value and Debt to Income loans may be refinanced is heavily regulated by the BNR.


Mirciulici January 6, 2012 at 21:37

The second link in the first paragraph (the “here” link) misses the colon after http, and is therefore broken. Other than that, great stuff as always :)


SvG January 7, 2012 at 00:19

Thanks! Fiexed that.


Alexander Fuhrmann January 6, 2012 at 21:57

Good and well structured article with a few points worth considering in particular the one about the role of the electorate to influence the cost of banking services through changes in the legal environment.
I do not agree however on a number of points. You included on the list of exogenous items things like Collection costs and repossession of asset costs which as far as I know, are not legally set, therefore a bank that is more efficient can reduce them and hence increase profitability or reduce prices. Another area of frustration is the quality of service and customer care foreign banks offer in Romania which is way below what they offer in their home markets and at higher price. And this is, in my opinion, the result of lack of real competition. Lack of competition can be the result of a number of things. One is lack of competitors, others are more demand than supply or submissive and undemanding customers. (but then submissive customers may be an exogenous aspect, that could go on your list above. It would not look good, though).


SvG January 7, 2012 at 00:40

Indeed collection cost or repossession costs are not legally set, but if the costs go up-for whatever reason- on a system level, then this is more likely to be considered as a “cost of doing business” and will be passed on. Example, if insolvency procedures in practice don’t work and take a long time, this means the cost goes up. This affects all banks in the same way.
Of course (real) competition is a factor. It is difficult to compare pricing between markets, transaction volumes and transaction sizes are much higher and funds costs lower. What about the cost of paying utility bills for instance, in Romania most people insist on paying in cash, in home markets direct debit is the most used.


bhuttu January 7, 2012 at 00:50

Mr. Groningen, it is a given that I highly appreciate the time you take on giving your opinions on Romanian banking while at the same time providing a space for dialogue around it. Since my every comment on your blog should start this way, I will make no further mention of this. :)

In regards to this article, I have two small comments:

1. About the exogenous costs: I believe banks CAN influence these, although the process is rather slow-paced and can only be taken into account in long-term strategies. But by increasing public trust, by creating an honest and real dialogue with the law-makers and by practicing truly responsible business, I believe regulatory and legal costs can greatly decrease. Maybe even the liquidity and insurance requirements. Of course, this might sound a bit naive, as it also requires a financially educated and responsible public, as well as a political class worthy of this name. However, if someone should do this, it is the private sector that has the best tools to do it. To get the ball rolling, at least.

2. As for the internal costs, you are pointing to competitiveness as the sole factor influencing this. While this might be true in the same naive environment I was talking about on point 1, we know that in real life a number of factors tend to interfere. Such as, for instance, unfair up to illegal agreements between the major players on the market to keep the prices on a certain level, in no way dependent of the costs. I’m not saying this is happening, I am saying it is possible to happen. I wouldn’t be surprised to hear about it, though, as the famous case of Holcim-Lafarge has made the media and I know of at least another industry where these silent agreements are common ground.

So, even if you are pointing to the politicians as the main force for driving the change, there’s plenty to do in the internal courtyard as well. The idea that the banks are making enough profit to support the costs of increased regulations is naive? Maybe, but all these stories about huge CEO bonuses have to come from somewhere!


SvG January 7, 2012 at 10:09

You are right that the private sector will have to drive the change and that for this a dialogue is needed.Education and understanding of issues if indeed a condition for this. Of course banks need to improve their internal costs and I am sure we will see this happening. I wonder if all banks really know the costs structures of their products and services. There are no agreements whatsoever in the banking sector to keep prices at certain levels and it wouldn’t work.
The stories of huge CEO bonuses come from the investment banks in the USA. My salary is a good one and part of it is a bonus. This is linked only partially to financial results of which profit is again only a part. The size of such bonus is related to the salary and in no way comparable to what is happening in investment banking (in the USA). I am not interest in maximizing short term profit and don’t consider this my job. Please read this post Confession of a Banker


bhuttu January 7, 2012 at 12:47

The article linked is nice, and the ideas expressed there apply to pretty much every good professional. Expressing them is one of the reasons why I am one of your admirers.

The point I was trying to make, however, is that there is a huge lack of trust of the general public towards banks, which impedes dialogue. And for this centuries-old mistrust, it is not just the public to be held responsible, but mainly the bad habits of the financial industry. The change is difficult to make, but it has to be done. And someone should get it started.


Adrian January 7, 2012 at 02:35

Every now and then, when this discussion arises, the bankers come out and whine on many voices and tones that the money cost in Romania cannot go south because, you know, EURIBOR, CDSs, bond spreads, international markets, internal costs or even “consumer mood” are fighting realy hard against it. I think that the country’s continental climate is the only unused reason ’til now, but I might be wrong.
Of course, the same bankers constantly fail to explain why the money cost skyrocketed even in the years when those factors were extremely low (for instance, in 2004-2005 when EURIBOR was around 1% and Romania’s CDSs about 100 basis points, the banks were selling loans with 10-15-20% interest; in those years, a Romanian would take a mortgage loan with 10%, but a French with a 2% interest). Or why the “taxe și comisioane” system they use in Romania is unheard of in the civilized world.
Nobody believes that the banks are kindergartens, sure. They just want to make as much money as possible, while being regulated as little as possible and take the taxpayers’ money when the shit hits the fan. And that’s just fine, ’cause this is the game and we all know it.
But please, at least spare us of this kind of hypocrisy. You, together with your Chief Hypocritical Officer, Mugur Isarescu. Thank you.


SvG January 7, 2012 at 09:38

Mugur Isarescu is not my chief


Luminita January 13, 2012 at 13:37

Dar trebuie sa tineti cont de ceea ce spune!!! :))


Stefan Balica January 7, 2012 at 05:48

What about the ratio of direct debit costs for the client to median current account balance (or median income) in the home market vs. Romania. I don’t have the numbers but someone in the bank has them. I think the answer to your question can be found by comparing this ratio.


SvG January 7, 2012 at 09:36

Or, as was done if I remember correctly, in the Roland Berger study, to compare cost of an certain package of banking services to the level of average income in a country.


Razvan January 7, 2012 at 12:42

Dear Sir,

I have a current account at your bank RFS where I get my monthly wage from my employer. Every month when I get my wage, your bank taxes me (again, me, not the employer) a fee (4RON) because I dare to use RFS as bank.

Would you be so kind to explain what kind of cost your bank has when it receives money from a client? I admit that this question puzzles me for some time and because I saw this intellectual debate about internal and external costs, I could to refrain from asking it here.

Happy new year and less abusive taxes on your clients.


SvG January 27, 2012 at 10:40

The money fee you pay is I believe a monthly maintenance fee. It is charged independent of the use of the account. Any account incurs cost for a bank even without being used. Every day interest calculations and accruals, reporting, statements, are examples. It also cover the cost of real usage for which clients are not charged. For my account in the Netherlands I pay a monthly maintenance fee that is fixed, regardless of usage.


bhuttu January 12, 2012 at 23:46

Don’t you think it’s funny, the news of “cartel practices” of the petroleum companies emerging only a few days after I mentioned unfair agreements between major players of various industries? I am very interested why you are saying that such an agreement “wouldn’t work” in the banking industry.


Leave a Comment

{ 1 trackback }

Previous post:

Next post: